Consider the model of section 12.4.1. Show that if the foreign country maintains its emission tax, domestically emission taxes and tradable permits are equivalent.

Data from section 12.4.1

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As a step towards characterizing the optimal unilateral policy for the home country, we first describe the competitive equilibrium in an economy, without trade-limiting tariffs or quotas. While maintaining the assumption that the foreign country uses an emission tax, we look at equilibria when the domestic country uses a tax, and when it uses a quantity instrument. Equilibrium When Both Countries Use an Emission Tax The competitive market equilibrium of our stylized world economy is determined by utility maximization of home and foreign consumers, so that